MACRO TRENDS FAVOUR INDIA EXPOSURE.
WHY THIS FUND MANAGER IGNORES THE NOISE AND LIKES INDIA’S PROSPECTS
The U. K.’s ability to negotiate a smooth exit from the EU and the potential fallout from Russian meddling in November’s U. S. election are just two of the unknowns t hat market watchers are fretting over these days.
But sometimes external factors that can shake markets in the short term don’t matter as much as the persistent macro forces humming away in the background.
Greg Placidi, senior portfolio manager at Excel Investment Counsel, calls these sustainable secular growth themes “unstoppable forces” — investment drivers that often get overlooked when people pay too much attention to noise surrounding the market.
“A lot of people can’t see the forest because of the trees sometimes,” Placidi said, highlighting the massive growth of middle- class consumption already underway in the emerging markets.
The OECD Development Centre projects middleclass consumption will rise to US$ 51 trillion globally by 2030, from US$20 trillion in 2010.
Emerging markets only accounted for 20 per cent of that, but that number is expected to climb to 65 per cent in the next 15 years or so.
At the same time, the emerging market population is migrating from rural areas toward cities.
McKinsey & Co. expects 40 per cent of global growth will come from mid- sized EM cities by 2025.
“The huge populations in these countries means that they can look internally for domestic growth, and don’t have to worry as much about developed nations,” Placidi said. “The same thing happening in the developed world after World War II, as what grew the economic platform of both North American and Europe, was the middle class and urbanization off of farms.”
These themes should be no secret to investors, particularly given the changes in China’s economy in recent years, but Placidi pointed out that demographic trends in India make that country even more compelling.
“India is, in some ways, 15 to 20 years behind China where it comes to the emergence of the middle class,” the portfolio manager of the Excel Blue Chip Equity Fund said. “There is much more opportunity in India, especially for multinationals, than there is in China.”
Placidi highlighted India’s projected GDP growth rate of 7.5 per cent next year, whereas China may find it difficult to hit six per cent. Over the next decade, the prospects look even brighter for India relative to its northeast neighbour.
“India is by far the more fertile ground,” the manager said.
One of the 40 to 50 blue chip companies Placidi owns in the portfolio is Maruti Suzuki India Ltd. ( MSIL/ IN).
The company produces affordable cars primarily for the Indian market, but also exports to Africa, Latin America and elsewhere in Asia.
Placidi noted that it is by far the largest passenger vehicle manufacturer in India with 47- per- cent market share, about 17 different brands, and annual production of more than 1.5 million units.
He highlighted the low penetration rates of autos in India. According to the OICA, just 22 out of every 1,000 people owned cars in India as of 2014, whereas that figure is 640 in Canada.
Meanwhile, 3.8 million cars were sold in India in 2016, compared to just 2 million in Canada.
“Disposable income is a lot higher here in Canada, but as it grows with GDP in India, we are going to see stronger penetration of automobiles,” Placidi said.
Apple I nc. (AAPL/ Nasdaq) is another company banking on growth in India, which chief executive Tim Cook called a “great place to be.”
Not unlike China several years ago, Apple sees India as a big opportunity in the smartphone market.
In 2016, the company sold roughly 2.5 million iPhones in India, but that represented only about two per cent of the overall market. That put Apple in 10th place, according to Counterpoint Research.
“There is no way Apple is going to be happy with a 10th- place ranking over the next three or four years,” Placidi said, pointing to forecasts for 750 million cellphone sales in India by 2020.
The manager is also optimistic about the upcoming iPhone 8 launch, as well as the prospect of a tax holiday that could allow Apple to repatriate some of its more than US$ 220 billion in cash held overseas.
“That would allow Apple to buy anything they want,” Placidi said, noting that if the company is serious about boosting its entertainment content, it could easily buy Disney or Netflix with little or no debt.
Walt Disney Co. ( DIS/ NYSE) happens to be another fund holding, in part, because Placidi likes the company’s roster of powerful global brands such as Disney, Pixar, Lucasfilm and Marvel.
“Almost anything they put out does extremely well,” he said.
Disney also has a very strong relationship with the Chinese government, something that was necessary when it wanted to build and open the Shanghai Disney Resort.
Placidi noted that the Chinese theatre market is becoming the largest in the world, as box- office receipts are growing at 29 per cent annually, compared to only four per cent globally.
Disney also recently did a deal with Tencent that allows the Chinese Internet platform to live stream a lot of ESPN content, including NBA games and international soccer matches, which are broadcast in Chinese.
“This has become a major market for them, and they are already producing the content anyway,” Placidi said.